Garnaut calls for cut to electricity returns

Prominent economist
Ross Garnaut
has called for a reduction in the guaranteed rate of return on investment for electricity networks, claiming the rules are “unsustainable".

Speaking to a Senate select committee on electricity prices, Professor Garnaut also advocated allowing communities to buy distribution assets and opt out of existing electricity networks.

Dr Garnaut’s comments come after The Australian Financial Review reported national and state energy price regulators were toughening up allowable power company infrastructure and borrowing costs.

Research from energy efficiency firm BigSwitch Projects on energy price increases for businesses since July 1 reveal increases of up to 75 per cent in the peak demand charges imposed by some electricity ­networks.

Dr Garnaut told the committee power prices had risen more between 2006 and 2012 than any other comparable period in Australia or in other developed countries.

He said the reason for the increase was the contribution from transmission, distribution and retail energy sectors. In contrast, the cost of wholesale electricity – including the carbon price – was lower in real terms now than in 2006.

“Where we went wrong is adopting rate of return regulation of prices and rate of returns that was too high," Dr Garnaut said.

“I think, frankly, we have to face up to having made a mistake in regulation in 2006 and that mistake has given very large amounts of income and wealth to some people."

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As demand for power has fallen in response to increases, energy prices had increased even further to make up for the lost revenue, he said.

“It is basically a risk-free rate of return," he said.

“We are in that unsustainable ­situation now."

He said for government-owned network companies a decision had to be made whether there were better ways of raising revenue.

“Is artificially raising the price of electricity a good way for government to raise revenue? I would expect there will be alternative forms of revenue that would give you the fiscal effect you want at much lower cost to the community."

Under rules being reviewed by the federal regulator, state-owned distributors are allowed a return on debt of 9 per cent, even as the cost of debt falls to 3.5 per cent thanks to strong offshore demand.

The study by BigSwitch of 66 large business power users found the average price increase was 18.6 per cent after the start of the carbon price scheme, although the increases ranged as high as 53 per cent and as low as an actual fall of 5 per cent.

The carbon price added on average 11 per cent but there were also large increases in “demand charges" imposed for the maximum power demand.

For sites supplied by the major Ausgrid network in NSW, the demand charge rose between 69 per cent and 75 per cent, while the charge for the Energex network in Brisbane was up between 29 per cent and 46 per cent.

BigSwitch managing director Gavin Gilchrist said the businesses surveyed did not know peak demand charges would go up so much.

“While everyone’s been focused on the carbon price, many electricity companies have imposed a historic shift in the way business is charged for power, one few would be aware of," he said.